State Universal Service Funds 2014

Sherry Lichtenberg, Ph.D.

Principal Researcher, Telecommunications

National Regulatory Research Institute

Report No. 1505

June 2015

2015 National Regulatory Research Institute

8611 Second Avenue, Suite 2C

Silver Spring, MD 20910

Tel: 301-588-5385

www.nrri.org

ii

National Regulatory Research Institute

About NRRI

NRRI was founded in 1976 by the National Association of Regulatory Utility

Commissioners (NARUC). While corporately independent, NARUC and NRRI are

linked in multiple ways to ensure accountability. NARUC, as the association of all state

regulators, is invested in quality research serving its members. NRRI coordinates its

activities to support NARUC's policy, research, educational and member-support service

to state commissions.

Mission Statement

To serve state utility regulators by producing and disseminating relevant, high-quality

research that provides the analytical framework and practical tools necessary to improve

their public interest decision-making. In all its activities, NRRI embodies the following

values: relevance, excellence, objectivity, creativity, independence, fiscal prudence,

ethics, timeliness and continuous improvement.

Board of Directors

Chair: Hon. Greg R. White, Commissioner, Michigan Public Service Commission

Vice Chair: Hon. T. W. Patch, Commissioner, Regulatory Commission of Alaska

Treasurer: Hon. Betty Ann Kane, Chairman, DC Public Service Commission

Secretary: Rajnish Barua, Ph.D., Executive Director, NRRI

Hon. ToNola Brown-Bland, Commissioner, North Carolina Utilities Commission

Hon. David W. Danner, Chairman, Washington Utilities and Transportation Commission

Hon. Elizabeth B. Fleming, Commissioner, South Carolina Public Service Commission

Hon. James W. Gardner, Vice Chairman, Kentucky Public Service Commission

Charles D. Gray, Esq., Executive Director, NARUC

Hon. Robert S. Kenney, Chairman, Missouri Public Service Commission

Hon. Robert Powelson, Commissioner, Pennsylvania Public Utility Commission

Hon. Paul Roberti, Commissioner, Rhode Island Public Utility Commission

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About the Author

Sherry Lichtenberg, Ph.D. is the Principal for Telecommunications at the National Regulatory

Research Institute. Her telecommunications background includes competitive advocacy on the

state and federal levels, operational support-systems design, performance metrics, contract

arbitration, program management, and third-party testing. She has been a product manager,

business manager, and operations leader for AT&T, MCI, and Verizon Business competitive

local services. Dr. Lichtenberg received her Ph.D. in English Literature from Rutgers

University.

Acknowledgments

The author wishes to thank Sandy Reams, Kansas Corporation Commission, Sally Getz,

Indiana Utility Regulatory Commission, Greg Doyle, Minnesota Department of Commerce, and

Thomas Wilson, Wyoming Public Service Commission for their help in developing the NRRI

State USF survey and their on-going progress reviews and comments.

iv

Executive Summary

Universal Service is a key component of both Federal and State communications policy.

Its goal is to ensure that all citizens have access to robust, reliable communications services,

including broadband connectivity, at affordable rates, with "reasonably comparable service"

across the country. Federal Universal Service funds (FUSF) provide a baseline for ensuring that

comparable service is available to both urban and rural consumers. State funds both add to

support provided by the Federal USF and are used to provide targeted support to address specific

issues faced by each state's consumers.

NRRI's 2014 State USF review examines the way in which the states have addressed the

question of universal service through state funds that supplement the four areas defined by the

FCC--high cost support, low income support, support for schools and libraries (E-rate), and rural

healthcare support. This paper examines changes to the state USF funds between 2012 and 2014

due to legislation, the FCC's USF Transformation Order, new rate benchmarks, and the move to

include broadband in the Connect America Fund (CAF). The paper addresses the ways in which

carriers and end users contribute to the funds, as well as the ways in which State funds are

disbursed. This discussion provides data that may help State regulators and others respond to the

FCC's current examination of the Federal USF contribution methodology, as well as manage

their own State funds. The facts provided by the study will help the States make decisions on

their funds, the FCC to understand the impacts of the ICC/USF Transformation Order on the

states, and provide input on the way in which fund contributions may be structured in the future.

Forty-nine states and the District of Columbia responded to the NRRI 2014 survey.1

Only one state, Hawaii, did not respond.

The states have multiple funds to support multiple universal service obligations. For

simplicity, NRRI uses the term State USF in this study to refer to all of these funds, including

access restructuring funds (Intrastate Access Support or IAS), Lifeline funds,

Telecommunications Relay Service (TRS), accessible telecommunications equipment (TEP)

funds to provide specialized customer premises equipment to the hearing and visually impaired,

and other funds established by state law.

In all, 45 states provide some form of State universal service support in addition to the

Federal funds. Six states, Alabama, Florida, Massachusetts, New Jersey, Tennessee, and

Virginia, have no State funds. Although it has no fund, Florida requires all carriers to provide

1 For simplicity, we refer to the District of Columbia as a state throughout this report.

v

Lifeline service. Massachusetts has no State fund but provides broadband support through a

State grant program.

State USF support includes high cost support (22 states), funds for broadband access for

schools and libraries (5 states), funding for Lifeline (17 states), and dedicated broadband funding

(5 states). The majority of states direct USF contributions to specific funds. Two states, Texas

and Washington, use a different methodology. Texas collects its USF as a single lump sum,

which is then disbursed by the Commission to each state fund based on need. Washington funds

universal service through the State's General Fund and then directs it to specific funds.

The largest proportion of SUSF funding (both in the number of states with a fund and the

dollar value of that fund) is directed to supporting carriers that provide service in high cost or

remote areas. Nearly half of the states with funds (22) provide high cost support. State high cost

funds provide financial support for providers offering service in high cost and remote areas.

Changes to the high cost funds over the study period, including the reduction or elimination of

funding in areas served by competitive suppliers, have reduced the size of the fund in some cases

or redirected monies to other uses in other cases.

Three states have Intrastate Access Restructuring Support (IAS) funds specifically

designed to mitigate the effects of access charge reductions on carriers. For example, Michigan's

fund is designed specifically to mitigate the effects of bringing intrastate access charges into

alignment with interstate access charges on rural carriers. Where the states support IAS reform

but do not designate a separate fund, we include their value in the high cost fund.

The State Universal Service funds grew just under 10% over the study period, from

$1,354,782,370 in 2012 to $1,484,569, 879 in 2014. The growth in the funds was largely driven

by significant increases in broadband and E-Rate funding in California and high cost growth in

Illinois. The growth of State USF funds was tempered by reductions in Lifeline support and IAS

funding, both driven by changes in federal regulation. State Lifeline funding decreased over the

study period, as a result of both reductions in State support levels and more stringent eligibility

requirements, including the elimination of duplicate registrations. One state, Wyoming,

eliminated its State Lifeline program at the end of the study period. Additional reductions in

Lifeline funding will occur over the next few years, as more states limit the amount of support

they provide above the Federal benefit.

Contributors to the State USF vary by state and often by fund. All 50 of the states that

responded to the NRRI survey assess wireline carriers, including CLECs. More than half of the

states (32) assess intrastate long distance carriers (IXCs). Over half of the respondents (28)

assess wireless providers. Seventeen states assess intrastate voice service provided by cable

companies, while 13 states also assess interconnected VoIP providers.2 Eight states assess end

2 For the purposes of this paper, we categorize voice service provided by cable companies

separately from other interconnected voice services, such as those provided by Vonage or Skype.

AT&T's U-Verse service and Verizon's FiOS service are also included in the interconnected VoIP

category.

vi

users. Twelve states assess paging companies. In some states, cable and interconnected VoIP

providers contribute voluntarily. Voluntary contributors include one VoIP provider in New York

and one cable company in Utah, as well as some VoIP providers in Oregon. Unlike the Federal

fund, which assesses providers a flat rate adjusted on a quarterly basis, collection by States

differs depending on the fund to be supported. This allows the states to hone their funding

requirements more specifically and to test out different contribution and funding methodologies.

The State Fund Overview table summarizes the findings of the 2014 NRRI Universal

Service Survey.

State Universal Service programs are a significant tool for meeting the important policy

goal of ensuring access to telecommunications for all citizens, regardless of where they live or

their financial status. Continuing study and review of information on how various states meet

this goal will remain an important public utility commission activity, now and in the future.

State Fund Overview

Who is Assessed?

On What Basis?

State Landline Wireless VoIP Cable IXCs Paging End

Users Other

Intrastate

Revenues Per Line Other

Gross Net

AL

AK X X

X X X

X

AZ X X X X X X

X

X

AR X X X X X

X

CA X X X

X

X

CO X X

X X

X

CT X X

X

X

DC X

X X

X

DE X

X

X

FL

GA X

X X

X X X

HI

ID X

X

X X (4)

IL X

X

X

IN X X

X

X

IA X X

X

X

X (5)

KS X X X X X X

X

KY X X X X

X

LA X X X X X

X

ME X X X X X

X

MD X X X X X

X

MA

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Who is Assessed?

On What Basis?

State Landline Wireless VoIP Cable IXCs Paging End

Users Other

Intrastate

Revenues Per Line Other

MI X X

X

X

X

MN X X X X X X

X

MS

MO X

X X

X

MT

X

X

NE X X X X X X

X

NV X X X X

X

NH X

X

X

NJ

NM X X

X

X

X

NY X

X (1) X

X

NC

X

X

ND X X

X

OH X X X X X X

X

OK X X X X X X

X

OR X X X (2)

X

X

X

X

PA X

X

X

X

RI

X

X

SC X

X

X

X (6)

SD X X

X X X

X

TN

TX X X

X X

X

UT X X

X (3) X

X

VT

X

X

VA

WA

X

X (7)

WV

X

WI X X X X X

X

WY X X

X X X

X

Notes:

(1) NY: One VoIP provider contributes voluntarily

(2) OR: VoIP providers contribute voluntarily (3) UT: One cable company contributes voluntarily

(4) ID: Contribution differs by program

(5) IA: Wireless contribution by assigned number (6) SC: Wireline: Retail rev., Relay per line, IAS allocated from prior year

(7) WA: Allocation from State general fund

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Table of Contents

I. Introduction .................................................................................................................1

A. Organization .....................................................................................................3

B. Methodology ....................................................................................................4

II. Defining Universal Service .........................................................................................4

III. State Universal Service Funds ....................................................................................8

A. Types of State Funds ......................................................................................11

B. Changes in Fund Size: 2012-2014 ................................................................13

1. High Cost Support...............................................................................13

2. Intrastate Access Reform ....................................................................17

3. Broadband Funding .............................................................................17

4. Lifeline ................................................................................................20

5. Schools and Libraries (E-Rate) Fund ..................................................22

6. Telecommunications Equipment Program (TEP) ...............................24

7. Telecommunications Relay Service (TRS) .........................................25

8. Other Funds .........................................................................................26

IV. State Fund Contributors and Recipients ................................................................28

A. State USF Contributors ..................................................................................31

B. Basis for contribution .....................................................................................33

C. Contribution Rates by Fund ...........................................................................34

1. Fund specific rates ..............................................................................34

2. Rate by provider type/revenue stream ................................................35

D. Fund Distribution Requirements ....................................................................36

1. Benchmark Rates ................................................................................37

2. Carrier of Last Resort..........................................................................40

3. Competition.........................................................................................40

4. Other requirements..............................................................................40

V. 2014 USF Changes .....................................................................................................43

A. Changes to fund size ......................................................................................44

1. Kansas .................................................................................................44

2. New Mexico ........................................................................................45

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3. Oregon.................................................................................................46

4. Texas ...................................................................................................47

5. Wyoming.............................................................................................48

B. Distribution Requirement Changes ................................................................49

1. Competitive Test .................................................................................49

2. Broadband Requirement .....................................................................49

C. Lifeline changes .............................................................................................50

D. TRS/TEP changes ..........................................................................................51

E. Contribution Reviews .....................................................................................52

VI. Conclusions ................................................................................................................53

Bibliography .....................................................................................................................56

Appendix A: Survey .........................................................................................................60

Appendix B: Survey Responses ......................................................................................64

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List of Figures

Figure 1: State USF Funding .......................................................................................................... 9

Figure 2: State USF Funding Comparison 2012-2014 ................................................................. 11

Figure 3: Number of State Funds by Fund Type .......................................................................... 12

Figure 4: State High Cost and IAS Funds ..................................................................................... 13

Figure 5: High Cost Fund Changes 2012-2014 ............................................................................ 14

Figure 6: 2014 Broadband Fund Size ........................................................................................... 18

Figure 7: Lifeline Funding by State .............................................................................................. 21

Figure 8: Wyoming Lifeline Customers ....................................................................................... 22

Figure 9: E-Rate Funding by State................................................................................................ 23

Figure 10: TEP Funding by State.................................................................................................. 25

Figure 11: TRS Funding by State ................................................................................................. 26

Figure 12: Types of Contributors (Total Across All States) ......................................................... 31

Figure 13: Benchmark Rates ......................................................................................................... 38

List of Tables

Table 1: Other USF Funds ............................................................................................................ 27

Table 2: State Fund Summary ....................................................................................................... 29

Table 3: Types of Contributors by State ....................................................................................... 33

Table 4: Revenues Assessed by State ........................................................................................... 34

Table 5: Contribution Formulas .................................................................................................... 36

Table 6: State Specific Benchmarks ............................................................................................. 38

Table 7: Basis for Benchmark Rates ............................................................................................. 40

Table 8: SUSF Distribution Requirements ................................................................................... 41

Table 9: Carriers Receiving Support by State............................................................................... 42

Table 10: Changes to State USF 2012-2014 ................................................................................. 44

1

State Universal Service Funds 2014

I. Introduction

Universal Service is a key component of both Federal and State communications policy.

Its goal is to ensure that all citizens have access to robust, reliable communications services,

including broadband connectivity, at affordable rates, with "reasonably comparable service"

across the country. Federal Universal Service funds (FUSF) provide a baseline for ensuring that

comparable service is available to both urban and rural consumers. State funds both add to the

support provided by the Federal USF and are used to provide targeted support to address specific

issues faced by each state's consumers.

NRRI's 2014 State USF review examines the way in which the states have addressed the

question of universal service through state funds that supplement the four areas defined by the

FCC--high cost support, low income support, support for schools and libraries (E-rate), and rural

healthcare support. This paper examines changes to the state USF funds between 2012 and 2014

due to legislation, the FCC's USF Transformation Order, new rate benchmarks, and the move to

include broadband in the Connect America Fund (CAF).3 The paper addresses the ways in

which carriers and end users contribute to the funds, as well as the ways in which state funds are

disbursed. This discussion provides data that may help State regulators and others to respond to

the FCC's current examination of the Federal USF contribution methodology, as well as manage

their own State funds. The facts provided by the study will help the States to make decisions on

their funds, the FCC to understand the impacts of the ICC/USF Transformation Order on the

states, and provide input on the way in which fund contributions may be structured in the future.

Forty-nine states and the District of Columbia responded to the NRRI 2014 survey.4

Only one state, Hawaii, did not respond.

The states have multiple funds to support multiple universal service obligations. For

simplicity, NRRI uses the term State USF in this study to refer to all of these funds, including

access restructuring funds (Intrastate Access Support or IAS), Lifeline funds,

Telecommunications Relay Service (TRS), accessible telecommunications equipment (TEP)

funds to provide specialized customer premises equipment to the hearing and visually impaired,

and other funds established by state law.

In all, 45 states provide some form of State universal service support in addition to the

Federal funds. Six states, Alabama, Florida, Massachusetts, New Jersey, Tennessee, and

4 For simplicity, we refer to the District of Columbia as a state throughout this report.

2

Virginia, have no State funds. Although it has no fund, Florida requires all carriers to provide

Lifeline service. Massachusetts provides broadband support through a State grant program.

State USF support includes funds for broadband access for schools and libraries (5

states), funding for Lifeline (17 states), and dedicated broadband funding (5 states). The

majority of states direct USF contributions to specific funds. Two states, Texas and Washington,

use a different methodology. Texas collects its USF as a single lump sum, which is then

disbursed by the Commission to each state fund based on need. Washington funds universal

service through the State's General Fund and then directs it to specific funds.

The largest proportion of this funding (both in the number of states with a fund and the

dollar value) is directed to supporting carriers that provide service in high cost or remote areas.

Nearly half of the states with funds (22) provide high cost support. The State high cost funds

provide financial support for providers offering service in high cost and remote areas. Changes

to the high cost funds over the study period, including the reduction or elimination of funding in

areas served by competitive suppliers, have reduced the size of the fund in some cases or

redirected monies to other uses in other cases.

Three states have funds specifically designed to mitigate the effects of access charge

reductions on carriers. Where possible, we review these IAS funds separately. For example,

Michigan's access restructuring fund is designed specifically to mitigate the impact of bringing

intrastate access charges into alignment with interstate access charges; therefore, we address it as

part of the separate IAS category. Where the states do not designate separate Intrastate Access

Restructuring Funds, we include their value in the high cost fund.

The State Universal Service funds grew just under 10% over the study period, from

$1,354,782,370 in 2012 to $1,484,569, 879 in 2014. The growth in the funds was largely driven

by significant increases in broadband and E-Rate funding in California. USF growth was

tempered by reductions in Lifeline support and funding for intrastate access support, both driven

by changes in federal regulation. State Lifeline funding decreased over the study period, as a

result of both reductions in State support levels and more stringent eligibility requirements. One

state, Wyoming, eliminated the State Lifeline program during the study period. Additional

reductions should occur over the next few years, as more states limit the amount of support

provided above the federal benefit.

Contributors to the State USF vary by state and often by fund. All 50 of the states that

responded to the NRRI survey assess wireline carriers, including CLECs. More than half of the

states (32) assess IXCs. Over half of the respondents (28) assess wireless providers. Seventeen

states assess cable voice providers, while 13 states also assess interconnected VoIP providers. 5

Eight states assess end users. Twelve states assess paging companies. Maine assesses wireless

5 For the purposes of this paper, we consider voice service provided by cable companies as a

separate category from other interconnected VoIP services, such as those provided by Vonage or Skype.

We include AT&T U-Verse and Verizon FiOS in the interconnected VoIP category as well.

3

providers for the High Cost and E-Rate funds, but support from wireless carriers for the

broadband fund is voluntary.

In some states, cable and VoIP providers contribute voluntarily. Voluntary contributors

include one VoIP provider in New York and one cable company in Utah, as well as some VoIP

providers in Oregon. Unlike the Federal fund, which assesses providers a flat rate adjusted on a

quarterly basis, collection by States differs depending on the fund to be supported. This allows

the states to hone their funding requirements more specifically and to test out different

contribution and funding methodologies.

State Universal Service programs continue to be an important tool for meeting the

important policy goal of ensuring access to telecommunications for all citizens, regardless of

where they live or their financial status. Continuing study and review of information on how

various states meet this goal will remain an important public utility commission activity, now

and in the future.

A. Organization

For ease of reading, this paper is organized into six sections, with detailed information

following the order of the questions in the State USF survey provided in Appendix A.

Part I of this paper is this introduction.

Part II provides a brief overview of the history and current status of the federal universal

service fund.

Part III describes the state universal service funds. These funds include support for

specialized services for the disabled, as well as support for companies bringing their intrastate

transit rates into line with interstate rates as required by State law. This section reviews the

findings from the 2014 NRRI study and provides an update on the way in which the funds have

changed over the period between 2012 and 2014. It reviews changes in the size of the state

funds, additions or changes to contributors and contribution rates, as well as new funds added to

address the specific needs of state citizens.

Part IV describes the companies that contribute to State funds, and examines how

contributions are assessed, and how funds are distributed. Unlike the fixed funding rate of the

Federal funds, the States have chosen varying contribution methods depending on the type of

fund and the type of provider either being assessed or collecting and remitting fees from its

customers.

Part V reviews recent state legislation regarding universal service, as well as recent State

proceedings addressing USF funding and contribution. Changes to state universal service

funding, particularly the High Cost fund, have been mandated in several states in response to a

perceived increase in competition in these areas and reductions in regulation. Broadband

funding and funding for schools and libraries have grown significantly. Changes have also

occurred with the federal Lifeline program, which has affected state funding.

4

Part VI provides conclusions and recommendations.

B. Methodology

The NRRI 2014 State USF Survey was distributed to commission staff in the 50 states

and the District of Columbia. The author worked with NARUC's USF subcommittee to develop

the survey questions, distribute the initial questionnaire, and provide follow-up questions. The

2012 survey consisted of 10 questions. The 2014 survey consisted of 13 questions asking states

to describe the design of their funds, the types of funds supported, fund contributors, and the way

in which monies are distributed. The 2014 survey added questions about broadband deployment

and funding, as well as questions focused on the changes to state funds resulting from legislation.

The 2012 survey identified 20 states that were considering changes to their universal service

funds based on the USF Transformation Order or state legislation limiting funding and/or

redefining state funds. The 2014 survey followed up on these questions. The survey

questionnaire is found in Appendix A.

Forty-nine states and the District of Columbia responded to the NRRI survey.6 A

summary of the survey responses is found in Appendix B. Individual State responses are

available on request. Responses to the survey were tallied and used to provide the data in the

report. Responses to closed questions such as whether the state had a fund and what services the

funds support were tallied and are provided via charts in this paper. Responses to open-ended

questions, such as the effect of State or federal legislation on state funds, are discussed in the

relevant sections of the paper. The funding data provided in the paper, including the

categorization of the funds, was provided by the states. The dollar values of funds such as

Lifeline that provide support on a per subscriber basis are included in total State USF funding

where available. These funds are discussed separately in part III of this paper.

II. Defining Universal Service

The availability of reasonably comparable communications services to all citizens of the

United States at affordable rates, regardless of where they live, has been a key national policy

goal since the passage of the Communications Act of 1934. Section I of the Act establishes the

Federal Communications Commission (FCC) and instructs it

to make available, so far as possible, to all the people of the United States,

without discrimination on the basis of race, color, religion, national origin, or sex,

a rapid, efficient, Nationwide, and world-wide wire and radio communication

service with adequate facilities at reasonable charges, for the purpose of the

6 Hawaii did not respond to the 2014 survey. In 2012, Hawaii's Universal Service fund provided

$72,000 for Telecommunications Relay Service (TRS). Hawaii's current TRS funding is not included in

this paper. See Lichtenberg, Sherry, et. al., Survey of State Universal Service Funds 2012, National

Regulatory Research Institute, Report 12-10, July 2012, available at

http://communities.nrri.org/documents/317330/e1fce638-ef22-48bc-adc4-21cc49c8718d

5

national defense, for the purpose of promoting safety of life and property through

the use of wire and radio communication . . .7

Prior to the passage of the Telecommunications Act of 1996, the availability of

communications services at affordable rates even in rural locations was made possible by a

system where high long distance rates offset low local rates and higher rates for business

customers allowed lower rates for residential customers. Implicit support was calculated based

on embedded accounting records. Although telephone penetration was low when the 1934 Act

was passed, as a result of the move toward universal service, it increased to over 50% by the end

of World War II, with further gains thereafter.8

The breakup of the Bell System in 1984 and the introduction of competition in 1996

changed the paradigm for supporting universal service. With AT&T's local and long distance

companies separated from each other, long distance revenues could no longer subsidize local

services, causing a potential gap between urban and rural rates. To close this gap, the 1996 Act

created a Universal Service Fund (USF) to replace these implicit subsidies with direct funding

for carriers servicing high cost areas and to ensure that comparable service was provided to all

consumers across the country, regardless of their location. The Act established six key principles

for ensuring the availability of comparable services.

(1) Quality and Rates--Quality services should be available at just, reasonable,

and affordable rates.

(2) Access to Advanced Services--Access to advanced telecommunications and

information services should be provided in all regions of the Nation.

(3) Access in Rural and High Cost Areas--Consumers in all regions of the

Nation, including low-income consumers and those in rural, insular, and high cost

areas, should have access to telecommunications and information services,

including interexchange services and advanced telecommunications and

information services, that are reasonably comparable to those services provided in

urban areas and that are available at rates that are reasonably comparable to rates

charged for similar services in urban areas.

7 See Communications Act of 1934, 47 U.S.C.151 et. seq. As NRRI noted in a 2006 paper on

Universal Service, these goals were primarily "aspirational" in 1934, when fewer than 50% of Americans

had a telephone. Other than the Bell System slogan of "one carrier, one network, Universal Service,"

stated in the Kingsbury Commitment, there was no specific funding or direction for providing universal

telephone service. See Rosenberg, Edwin, Perez-Chavolla, Lilia, Liu, Zing, Commission Primer,

National Regulatory Research Institute, Report 06-08, May 2006, available at

http://communities.nrri.org/documents/317330/629f2912-da31-4b35-9acd-e206473dfccc

8 Id.

6

(4) Equitable and Nondiscriminatory ContributionsAll providers of telecommunications services should make an equitable and nondiscriminatory

contribution to the preservation and advancement of universal service.

(5) Specific and Predictable Support MechanismsThere should be specific, predictable, and sufficient Federal and State mechanisms to preserve and advance

universal service.

(6) Access to Advanced Telecommunications Services for Schools, Health

Care, and Libraries--Elementary and secondary schools and classrooms, health

care providers, and libraries should have access to advanced telecommunications

services.9

Universal Service support is provided to eligible wireline and wireless carriers that

provide interstate communications services covered under the Act.10

Carriers receiving federal

USF funds must meet quality and availability standards. Prior to being named "eligible

telecommunications carriers" (ETCs), carriers must be certified by the states as eligible to

participate in the federal Universal Service program.

Pursuant to Section 254(a)(1) of the 1996 Act, USF reforms were referred to the federal-

state Joint Board on universal service, then recommended by the Joint Board and largely

implemented by the FCC. Reforms were first implemented with the large former Bell operating

companies (BOCs) and Verizon, the non-rural carriers, using a forward looking cost model to calculate their support. Reforms were then implemented with the rural carriers, which were

initially kept under an embedded cost method, upon the recommendation of the Rural Task Force

appointed by the Joint Board and the FCC.

The federal government and the States share the goal of ensuring universal access to

communications services, including advanced services such as broadband, to all citizens. To that

end, both the federal government and many states provide universal service support. Although

this paper focuses on State universal service programs, we discuss the federal universal service

funds briefly as background for the review of state programs. With that background in mind, we

then review the States' response to the goal of universal service, particularly as it relates to

contributors to the fund and the ways in which funding is distributed.

Federal Universal Service support is provided through four funds:

9 47 USC 254(2)(b) Section 254 includes a seventh principle, directing the Federal-State Board

on Universal Service to create "such additional are necessary and appropriate for the protection of the

public interest, convenience, and necessity and are consistent with this Act."

10 California also provides support to interconnected VoIP carriers, as well as funding from the

California Advanced Services Fund for broadband only providers.

7

The Connect America Fund (formerly the High Cost Fund), which provides support for carriers providing voice and broadband connectivity in (primarily)

rural areas;

The Lifeline Fund, which provides discounted wireline and wireless services for low-income consumers;

11

The Schools and Libraries (E-Rate) fund, which provides funding for broadband access and other communications support for educational institutions;

The Rural Health Care Fund, which provides support to eligible health care providers for the telecommunications and broadband services necessary for the

provision of telemedicine services in rural areas.

Together, these four federal funds were expected to disburse approximately $9B in 2014, with

the largest share ($4B) coming from the Connect America Fund.

The Connect America fund was capped at $4.5B beginning in fiscal year 2014. 2013

expenditures for this fund were $4B. Lifeline fund expenditures vary depending on the number

of consumers who obtain support. This fund disbursed $1.8B in 2013 and was expected to

disburse $1.672B to low-income consumers during 2014, primarily due to program changes that

tightened eligibility criteria and eliminated duplicate enrollments. The Schools and Libraries

fund was capped at $2.6B in 2014 but will increase to $3.9B in 2015 as a result of changes in the

fund to increase broadband connectivity. This fund provided support in the amount of $2.2B in

2013. Finally, the smallest of the funds, the Rural Health Care Fund, was funded at $400M for

2014, but expended only $159M in 2013. 12

The Federal USF is funded by a percentage of end user revenues for interstate (long

distance) telecommunications services. Initially, contributions were required from long distance

providers (IXCs), wireline providers, wireless carriers, payphone providers, and some private

carriers that sell service on an individualized, contract basis. In 2006, the FCC broadened the

contribution base by adding interconnected VoIP providers "as a means of ensuring a level

playing field among direct competitors." 13

Revenues from "retail information services," such as

11

The Lifeline Fund was modified in 2012 to reduce costs and eliminate waste, fraud, and abuse

by instituting a one resident/one phone rule, eliminating the "link-up" payment that covered installation

costs in all areas but on tribal lands, and reducing the subsidy to $6.25 per month in rural and urban areas

and $10.25/month on tribal lands. See Lichtenberg, Sherry, Ph.D., Lifeline and the States: Designating

and Monitoring Eligible Telecommunications Carriers, National Regulatory Research Institute, Report

No. 13-12, November 2013, available at http://communities.nrri.org/research-

papers?p_auth=gfTDCrW6&p_p_auth=ut7hUO2h&p_p_id=20&p_p_lifecycle=1&p_p_state=exclusive&

p_p_mode=view&_20_struts_action=%2Fdocument_library%2Fget_file&_20_groupId=317330&_20_fol

derId=0&_20_name=9102

12 Op. cit. USAC Annual Report 2013. The most recent report covers the period from July 1,

2013 to June 30, 2014. The 2014 report will be issued by 3/31/15.

13

The largest contributors to the funds are the ILECs and the wireless companies. Cable voice providers and over the top VoIP providers like Skype do not contribute to the federal funds. See

8

cable voice and broadband are not included in the contribution base. USF charges are recouped

by these carriers through a surcharge on consumer bills. This surcharge is not assessed on

Lifeline subscribers.

Reductions in long distance prices (including the introduction of "all you can eat" plans),

changes in calling patterns, and the shift to broadband-enabled products such as cable voice and

over the top VoIP have reduced the interstate revenue assessed for universal service support,

resulting in the need to increase the contribution rate in order to maintain support at existing

levels, let alone increase it to cover broadband deployment and availability. Contribution rates

have risen steadily over the last 15 years and show no sign of moderating. The USF contribution

rate was 6% in 2000 and has increased yearly since that time. The 4Q2014 rate was 16.1%. The

rate was 16.8% for 1Q2015 and will rise to 17.4% in the second quarter.14

The FCC's

rulemaking on contribution proposes to address this issue by potentially broadening the base to

include more services and providers, but any resolution is at least a year away (if not several).

These changes in the Universal Service fund contribution rate will increase the pressure

on the consumers who ultimately pay for universal service support. They will also affect the

funds in states that provide additional support to carriers and consumers particularly in high cost

areas. This paper focuses on the way in which the States are supplementing the federal funds

through explicit state subsidies, and, in many cases, a larger contribution base.

III. State Universal Service Funds

State Universal Service funds (SUSF) provide support beyond the four areas funded by

the Federal USF. For example, nearly all the States assist in providing specialized equipment for

the hearing-impaired through Telecommunications Equipment (TEP) programs, support

telecommunications relay service (TRS) to enable the hearing impaired to communicate with

others, and fund special projects, such as reading for the blind, and public interest, low cost

payphones. State High Cost funds (HCF) and Interstate Access Support (IAS) funds assist rural

carriers in continuing to provide service in high cost rural areas by minimizing the losses these

carriers sustain as they bring their intrastate access charges into line with interstate rules

(including the change to bill and keep funding for originating access).

Most importantly, the State USF provides a "test bed" for determining how best to

support key telecommunications areas in the States, including providing service in high cost

areas, supporting disadvantaged and disabled consumers, and extending the reach of broadband

networks. The state funds address contribution and contributors in varying ways that may serve

as a guide for the FCC in determining how to broaden the contribution base of the federal funds.

Federal Communications Commission, In the Matter of the Universal Service Contribution Methodology,

Further Notice of Proposed Rulemaking, April 27, 2012, WC Docket No. 06-122, pg. 6, Contributors

14 See 2015 USAC Universal Service Contribution Factor projections, available at

http://www.usac.org/cont/tools/contribution-factors.aspx

9

The States condition distribution on a number of factors not considered in the federal program,

including limiting funding to unserved and underserved areas and creating funds to provide

specific support for broadband.

Forty-five states had state funds in 2014 compared to 44 states in 2012. 15

These funds

support a variety of services, including high cost support, broadband support, intrastate access

reform support, Lifeline, E-rate, and TRS and telecommunications equipment programs (TEP).

Delaware, which did not have a SUSF in 2012, created two funds in 2014 to support

telecommunications relay service (TRS) and broadband deployment. The Broadband fund is

managed by a state agency established specifically for this purpose. Broadband funding for

Delaware was estimated to be $2M in 2014.

Figure 1 shows State USF funding for 2014.

Figure 1: State USF Funding

Six states, Alabama, Florida, Massachusetts, New Jersey, Tennessee, and Virginia, do not

have State universal service funds.16

Florida requires all carriers providing service in the state to

participate in the Federal Lifeline program but does not have a state fund. No state discontinued

Universal Service support altogether in 2014, although two states, Wyoming and West Virginia,

15

State totals include the District of Columbia.

16 Massachusetts provides state grants for broadband development and TRS but does not consider

this support as constituting a State Universal Service fund.

HC, $527,323,785

IAS, $94,814,754 BB, $37,193,324

LL, $199,257,711

E-Rate, $163,284,907

TEP, $14,314,499

TRS, $86,868,607

Other, $25,512,292

10

will implement significant program changes in 2015. Wyoming discontinued its Lifeline fund at

the beginning of 2015 as a result of legislation passed in March 2015, but will continue to

provide high cost and TRS support. 17

West Virginia's broadband support program ended

12/31/2014. This program provided grants totaling $895,000 for broadband development in

unserved areas in 2014.18

Total State USF funding for 2014 was $1.49B, compared to $1.35B in 2012, a 10%

increase.19

This total includes $336,000,000 from the Texas SUSF. Texas provides SUSF

support as a single lump sum with specific program expenditures determined on a yearly basis.

For this reason, Texas's SUSF is included in the total amount of funding but not shown by a

specific program.

The increase in fund size resulted primarily from increased funding for high cost support,

broadband initiatives, and E-Rate in California, as well as slight funding increases in other states.

The growth in high cost funding was offset by reductions in intrastate access support and

reductions in Lifeline expenditures due to more stringent program rules and the elimination of

duplicate registrations.

Figure 2 compares 2014 SUSF funding to the amounts reported by the states in 2012.

17

See Wyoming bill HB0037, available at

https://legiscan.com/WY/text/HB0037/id/1134361/Wyoming-2015-HB0037-Enrolled.pdf. We discuss

this bill in Part V of this paper.

18 West Virginia passed legislation in April 2015 to add a new Broadband Authority to disburse

funds in the state, but it has not yet been funded.

19 Funding amounts were provided by the states in their responses to the state survey. Lifeline

funding fluctuates depending on the number of participants in the program. Some states reported only the

amount of support provided per customer, not the total amount of Lifeline funding for 2014.

11

Figure 2: State USF Funding Comparison 2012-2014

A. Types of State Funds

Together, the 45 states that provide universal service support fund a total of 89 programs

ranging from high cost support for carriers in rural and other hard to serve areas to public

payphones to reading services for the blind. The types of funds supported by the SUSF have

remained relatively unchanged since 2012, although their focus has shifted from

telecommunications to broadband initiatives. For example, Vermont modified its high cost fund

in 2014 to require companies accepting high cost support to use at least 50% of that funding to

build out broadband service in their territory. 20

In addition, some states, for example, Colorado and Wyoming, limit high cost support

only to those parts of the state where there is no competition.

High cost support, including Intrastate Access Reduction Support, remains the largest

category of state funds, representing 47% of the total number of states with state USF funds.

High cost funding grew slightly in 2014 but is expected to decrease as states like Colorado move

to provide high cost funding only in areas with competition from unsubsidized competitors. The

majority of states with high cost funds include Intrastate Access Support (IAS) monies in their

high cost funds. Three states, however, Alaska, Michigan, and New Mexico, have separate funds

to cover reductions in intrastate access revenues. We address these state funds separately.

20

See Vermont Act No. 190. An act relating to Vermont telecommunications policy,

available at https://legiscan.com/VT/text/H0297/id/1036262/Vermont-2013-H0297-

Chaptered.pdf

$0

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

HC IAS BB LL E-Rate TEP TRS Other

2014 Fund $1,495,248,837 2012 Fund $1,354,782,370

Total USF Funding

Note: $336,000,000 Texas USF funding not included in individual line items.

12

Figure 2 shows the types of funds supported and the number of states providing support

for each type of fund.

Figure 3: Number of State Funds by Fund Type

22 states have funds that specifically support high cost service. Of these states, 4, Georgia, Kansas, South Carolina, and Washington include support for intrastate

access reduction reform in their high cost funds.

5 states, Alaska, Georgia, Michigan, New Mexico, and South Carolina, have funds dedicated specifically to intrastate access reduction reform. Alaska,

Michigan, and New Mexico provide only IAS support; they do not provide other

high cost support.

5 states support broadband deployment programs. This number will drop to 4 in 2015, with the cancellation of West Virginia's broadband fund.

29 states support Telecommunications Relay Service (TRS) via a specific TRS fund. 14 states support telecommunications equipment programs (TEP) for the

hearing impaired. Other states, for example Illinois, provide support for relay

service and equipment through a single program.

5 states have funds dedicated specifically to providing telecommunications support to schools and libraries (E-Rate). This category was not addressed in

NRRI's 2012 survey.

17 states provide state support for Lifeline. This funding is in addition to the funding provided by the Federal Lifeline program.

4 states use universal service funds to support other public interest programs, including public payphones, hearing aids, and reading services for the blind.

High Cost, 22

IAS, 5

Broadband, 5

TEP, 14 TRS, 29

E-Rate, 5

Lifeline, 17

Other, 4

13

B. Changes in Fund Size: 2012-2014

State Universal Service program expenditures increased by 10% overall between 2012

and 2014. These increases were due primarily to increases in high cost funding in Arkansas and

California and growth in broadband support and E-Rate support in California. State USF

funding dropped in other states, primarily as a result of changes to the Lifeline program. We

explore these changes below.

1. High Cost Support

Twenty-two states provide high cost support for carriers serving rural or remote areas. In

the majority of states, support is limited to carriers of last resort (COLRs). The states that

provide high cost support are shown on the map in Figure 4.

Figure 4: State High Cost and IAS Funds

High cost funding grew by 13% between 2012 and 2014, from $475,031,090 to

$536,273,785.21

The largest increases were in Arkansas, California, Illinois, Utah, and

Washington.

21

High cost fund size is based on data reported by the states. The Texas fund is not included in this total, since funds are not specifically dedicated to any single program. Funding for Intrastate Access

Reduction Support (IAS) in the three states that provide this support via specific IAS funds is reported

separately.

14

High cost funding dropped in Colorado, Indiana, Kansas, Oregon, Pennsylvania, South

Carolina, and Wisconsin. These states either reduced the subsidies provided to rural carriers or

redirected these subsidies to areas without competition. Some of the change may also be

attributed to changes in IAS support in states where the high cost fund supports both high cost

service and access reductions.

Figure 5 shows the changes in high cost support between 2012 and 2014.

Figure 5: High Cost Fund Changes 2012-2014

a. Increases in High Cost Funding

The Arkansas high cost fund increased by $17,000,000, between 2012 and 2014, from

$22,000,000 to $39,000,000. Arkansas increased its high cost contribution rate from 2% in 2012

to 5% in 2014. The Arkansas high cost fund provides support to one former regional Bell

Operating Company (RBOC) and 24 incumbent local exchange carriers (ILECs). Support is

calculated based on the loop costs developed by the National Exchange Carrier Association

(NECA) each year. As loop costs increase, high cost disbursements increase proportionately.

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

$90,000,000

$100,000,000

AR AZ CA CO GA ID IL IN KS LA ME NE NV NY OK OR PA SC UT WA WI WY

2012 HC Funding

2014 HC Funding

15

California divides its high cost support into two funds. The California High Cost Fund A

(CHCF-A) and the California High Cost Fund B (CHCF-B). The California high cost funds

increased by 57% over the period, from $58.5M in 2012 to $92M in 2014. The increases were

driven by changes to the state's high cost funds, as a result of a 2014 rulemaking.

The CHCF-A supports 10 of the state's 15 rural ILECs. These companies are carriers of

last resort (COLRS) that provide service in high cost areas and are regulated under rate of return

rules. The subsidy amount received by these companies is determined by using a 10%

benchmark ROR and a $20.25 per month cost of providing basic residential telephone service.

Any earnings level below the 10% benchmark is made up through the CHCF-A subsidy.

The CHCF-B subsidizes large carriers providing service in high cost areas. The CHCF-B

supports four carriers (AT&T and Verizon), two mid-sized carriers (Frontier and SureWest), and

Cox (CLC). Each of these companies is a COLR in its service territory. Support is based on

costs in excess of $36.00 per access line in designated High Cost Fund B areas.

California revised the rules for CHCF-A during 2014 to allow small ILECs to

make additional draws from the California High Cost Fund-A Program in the

event of a decrease in their federal subsidy where two criteria are met: (1) the

Small Incumbent Local Exchange Carrier has mirrored the federal cap on per line

expenses where possible, unless doing so would supplement high cost support,

and (2) the Small Incumbent Local Exchange Carriers investments meet the one network criterion of serving to support both voice and broadband deployment.

22

To qualify for subsidies, a small ILEC's basic residential service rate must be between $30.00

and $37.00, inclusive of all charges.

The Illinois high cost fund grew by $8.9M between 2012 and 2014 (from $10M to

$18.9M) due primarily to the addition of an intrastate access reform component. The IL

contribution rate increased to 1.029% in 2014 from .40% in 2012. Illinois ILECs, CLECs, and

IXCs contribute to the State USF.

Utah's High Cost funding increased by $4.8M between 2012 and 2013, from $6.2M in

2012 to $11M in 2014. Utah's fund covers high cost support, intrastate access reform, and

Lifeline. This increase was projected in the state's response to the 2012 NRRI survey and

attributed to potential higher support costs.23

Utah assesses carriers 1% of total gross state retail

revenues to cover both the high cost and the Lifeline fund. It assesses carriers separately for

TRS.

22

See CHCF-A Fund Rulemaking, D.14-12-084, Ordering Paragraphs 7 and 8, available at

http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M143/K638/143638287.pdf.

23 Op. Cit, Lichtenberg, et. al., 2012 USF Survey

16

Washington's high cost funding includes support for intrastate access charge reductions

as well as high cost service. Unlike other states, Washington's Universal Service is funded from

the State's General Fund. The Washington fund grew from $3M in fiscal 2012 to a projected

$5M in fiscal 2014 (June 2014 July 2015). The 2012 USF fund was replaced by a new fund in 2014 as part of Dockets UT-131239. Other changes are forecast to the fund as a result of a

currently open Rulemaking, Docket UT-140680. We discuss these Dockets in Part V of this

paper, Current USF Legislation.

b. Decreases in High Cost Funding

High cost funding decreased slightly in Colorado, Indiana, Kansas, Louisiana, Oregon,

Pennsylvania, South Carolina, and Wyoming between 2012 and 2014.

Both Colorado and Kansas reduced their high cost funds as a result of legislation.

Colorado's high cost fund was reduced by approximately 10% (from $56M in 2012 to

$50M in 2014) as a result of legislation passed in 2014. House Bill 1328 grants high cost

support only to those areas determined to be without "effective competition." The funds made

available by this decision will fund broadband projects in rural areas of the state where there is

no broadband penetration.24

House Bill 1328 granted authority to the State Commission to

transfer high cost funds to the newly created Broadband Fund "if it determines [those funds] are

no longer required by the HCSM to support universal basic service through an effective

competition determination.25

Kansas reduced its high cost funding by approximately 7% between 2012 and 2014,

dropping from $52M to $48M. USF support for competitive ETCs has been capped at current

levels and will be reduced by 20% yearly until it is eliminated completely in 2018.

Kansas also reduced support for ILECs at the beginning of 2013. In addition, it removed

support for deregulated carriers (AT&T) and capped the support provided to CenturyLink at

24

See CO HB 1328, available at

http://www.leg.state.co.us/clics/clics2014a/csl.nsf/fsbillcont3/1E390935433C251F87257C620063CC4A?

Open&file=1328_rev.pdf; CO HB 1329, available at

http://legiscan.com/CO/text/HB1329/id/1015298/Colorado-2014-HB1329-Amended.pdf; CO HB 1330,

available at http://legiscan.com/CO/text/HB1330/id/1007380/Colorado-2014-HB1330-Engrossed.pdf; and

CO HB 1331, available at

http://www.leg.state.co.us/clics/clics2014a/csl.nsf/fsbillcont3/4034ECA181A3A0D587257C9B00794391

?open&file=1331_01.pdf

25 Id. HB 1328

17

$11.4M year. Rural support was modified to eliminate support for federal USF changes and

capped at $30M.26

2. Intrastate Access Reform

Intrastate access restructuring/reform funds (IAS) provide support to carriers to cover lost

revenue from restructuring rates to bring intrastate access charges into alignment with interstate

charges. Five states, Alaska, Georgia, Michigan, New Mexico, and South Carolina, have funds

dedicated specifically to access reform.27

2014 IAS disbursements totaled $94,814,754. This

total increased only slightly ($4M) over the 2012 disbursement level.

Michigan's fund was modified in 2014 to resize the amounts provided to carriers. The

FCC USF Transformation Order changing terminating access to a "bill and keep" arrangement

superseded the Michigan IAS Order and resulted in some reductions in the fund. The originating

access rules remain in place. In addition, Public Act 52 (2014) requires the MPSC to reduce the

amount disbursed to an eligible provider that discontinues service in an exchange on a pro rata

basis. The Act also requires the Commission to report any double recovery of access

restructuring monies from federal funds (Connect America Fund or Access Recovery Charge) to

the legislature. There have been no double recoveries to date. The Michigan Access Recovery

Fund will be resized again in 2018.28

New Mexico also made changes to its IAS Fund. In New Mexico, a December 2013

order established a 3% surcharge cap on High Cost Funding for 2014 and reduced IAS payments

by updating the formula used to compute support. The Commission also developed a process for

individual ETCs to apply for IAS support based on need.29

3. Broadband Funding

In 2014, 6 states (California, Colorado, Delaware, Maine, Nebraska, and West Virginia)

had funds specifically designated to support broadband deployment and adoption.30

Four states,

26

Kansas Telecommunications Act, HB2201, 2013, available at

https://legiscan.com/KS/text/HB2201/id/819606/Kansas-2013-HB2201-Enrolled.pdf

27 Other states include IAS in their general high cost fund.

28 Michigan Act 52, Michigan Telecommunications Act Revisions, available at

https://www.michigan.gov/documents/mpsc/MTAsummary_453136_7.pdf

29 See New Mexico Public Regulatory Commission Docket # 12-00380, available at

http://nmprc.state.nm.us/index.html

30

The West Virginia broadband fund was cancelled on 12/31/2014. We include it here for completeness. A new fund was established as part of West Virginia Senate Bill 488, available at

https://legiscan.com/WV/text/SB488/id/1171587/West_Virginia-2015-SB488-Enrolled.html. A decision

on funding is still pending.

18

California, Maine, Nebraska, and West Virginia had funds in 2012. Two states, Colorado and

Delaware, added broadband funds in 2014.

Broadband funding totaled $32,945,000 in 2014, up from $13,300,000 in 2012. This

increase was driven by the two states that added funds, as well as significant growth in

broadband funding in California.

Figure 6 shows the states with broadband funds and the amount of funding per state.

Figure 6: 2014 Broadband Fund Size

The California Advanced Services fund (CASF) increased from $3M in 2012 to $22M in

2014. This change drove a 62% increase in the value of the broadband fund. The California

Advanced Services Fund provides grants and loans for broadband deployment. The grants range

from 60% of infrastructure costs for underserved areas to 70% for unserved areas. The program

does not cover on-going operations and maintenance costs. The loan program was implemented

in 2012. The CASF originally provided support only to certificated telecommunications

companies (ILECs, CLECs, and IXCs). Senate Bill 740, enacted in 2014, expanded the program

to include non-telephone corporations, including municipal utilities.

Colorado established a broadband fund in 2014 using monies originally designated for

high cost support in areas subsequently deemed to be "competitive" and thus no longer requiring

high cost subsidies. HB 14-1328 created the fund and established an "independent board . . . to

California, $22,000,000

Colorado, $3,000,000

Delaware, $2,000,000

Maine, $1,248,324

Nebraska, $8,050,000

West Virginia, $895,000

19

implement and administer the deployment of broadband service in unserved areas from the

fund.31 The Colorado broadband fund includes

Moneys allocated from the high cost fund to provide access to broadband service

through broadband networks in unserved areas pursuant to [the rules defined by

the Commission to implement HB 14-1328.] transfer[ing] to the broadband

deployment board only the moneys that it determines are no longer required by

the HCSM to support universal basic service through an effective competition

determination. 32

Delaware also established a new broadband fund in 2014. The Delaware broadband fund

was expected to provide up to $2M for broadband projects in 2014.

Nebraska nearly doubled the size of its broadband fund in 2014, increasing it from $4M

in 2012 to $8,050,000 in 2014. The broadband program is a grant program which will award

approximately $8M in funding for broadband capital construction and $0.5 million for

broadband adoption programs in 2015. Funding for broadband capital construction projects will

be awarded based upon factors included in the NUSF-77 order.33

Broadband funding in Maine remained relatively the same between 2012 and 2014,

increasing just $51,000 to $1,248,324 in 2014.

West Virginia's broadband funding decreased from $5M in 2012 to $895,000 in 2014.

The West Virginia broadband fund disbursed all support and was cancelled at the end of 2014.

Legislation passed in 2015 will establish a new West Virginia Broadband Council to increase

broadband access throughout the state. The Council has not yet been funded.34

31

Section 40-15-509.5(5)(a), C.R.S.

32 Id. 40-15-208 (2 )(a) (I) (B)."

33 See Nebraska Public Service Commission, In the Matter of the Petition of the Nebraska

Telecommunications Association for Investigation and Review of Processes and Procedures Regarding

the Nebraska Universal Service Fund, Application No. NUSF-77, Progression Order No. 5, November 21,

2011

34 See West Virginia Senate Bill 488 available at

https://legiscan.com/WV/text/SB488/id/1171587/West_Virginia-2015-SB488-Enrolled.html

20

4. Lifeline

Lifeline, which provides a bill credit to low income consumers, represents the second

largest spending category for state universal service funds. Lifeline spending was $199,257,711

in 2014, down from $257,254,511 in 2012.35

Eighteen states have specific state Lifeline funds. These states are California, the District

of Columbia, Idaho, Kansas, Kentucky, Minnesota, Missouri, Nevada, New Mexico, New York,

Nebraska, Oklahoma, Oregon, South Carolina, Vermont, Washington, Wisconsin, and

Wyoming,

Utah includes Lifeline in its High Cost Fund rather than maintaining a separate fund.

Nebraska has a state Lifeline fund but did not report a figure for expenditures in 2014.

Total Lifeline expenditures have decreased as a result of changes to the Federal Lifeline

program to limit fraud and abuse by ensuring that recipients can have only one Lifeline account.

California represents the bulk of Lifeline spending at $150M, down $40M from 2012.

California expanded its Lifeline program in 2014 to include wireless and some VoIP providers.

All local telephone companies that offer residential voice grade telephone in California are

required to offer California Universal Lifeline Telephone service. The support amount is capped

at $11.50. This amount is based on the retail price of basic residential telephone less the Federal

lifeline subsidy.36

Figure 7 shows Lifeline funding by state.

35

This total includes only those states that reported a dollar value for Lifeline spending.

Nebraska and Utah did not report separate spending amounts for Lifeline. Utah includes Lifeline funding

in its High Cost Fund.

36 See CPUC Order Modifying Decision (D.) 14-01-036, And Denying Rehearing of Decision, as Modified, available at http://docs.cpuc.ca.gov/publisheddocs/published/g000/m099/k887/99887806.pdf

21

Figure 7: Lifeline Funding by State

Lifeline expenditures have also decreased as a result of limitations on state funding

support and, in some states, fewer program participants.

Idaho reduced its Lifeline funding from $3.50/month to $2.50/month in 2014.

In Wyoming increasing declines in the number of consumers participating in the program

have reduced the need for State funding. Figure 8 shows the decline in Wyoming's Lifeline

participants between 2008 and 2013.37

Wyoming's Lifeline Fund is repealed as of July 1, 2015.38

37 Data provided by Thomas Wilson, Wyoming Public Service Commission

38 Op. cit. Wyoming HB 37

AK, $2,008,087

CA, $150,000,000 DC, $408,123

ID, $1,142,500

KS, $3,900,000

KY, $360,000

MN, $2,000,000

MO, $1,150,316

NV, $269,740

NM, $800,000

NY, $22,800,000

OK, $1,807,321

OR, $4,600,000

SC, $1,000,000 VT, $715,000

WA, $4,000,000 WI, $2,510,000 WY, $56,364

22

Figure 8: Wyoming Lifeline Customers

5. Schools and Libraries (E-Rate) Fund

Five states, California, Maine, Oklahoma, Rhode Island, and Wisconsin, have funds

specifically designed to support telecommunications and broadband services for schools and

libraries. These funds totaled $163,284,907, in 2014, an increase of $103,184,907 over the

$60,100,000 in funding reported in 2012.39

Figure 9 shows 2014 E-Rate funding by state.

39 NRRI's 2012 USF survey included KAN-ED, a Kansas state fund to support schools and

libraries. KAN-ED was funded separately from the Kansas Universal Service Fund (KUSF). Funding from the KUSF was sunset June 30, 2013, via the Kansas Legislatures passage of Senate Bill 294. KAN-ED received $3,749,909 for the State fiscal year ending June 30, 2013. Four months (March June 2013) of that funding ($1.25M) was included in that years KUSF funding level and reported in NRRI's 2012 review of state USF funds. See, Lichtenberg, Sherry, Ph.D., et. al., Survey of State Universal Service Funds 2012, National Regulatory Research Institute, Report 12-10, July 2012, available at

http://communities.nrri.org/documents/317330/e1fce638-ef22-48bc-adc4-21cc49c8718d

12/31/2008 12/31/2009 12/31/2010 12/30/2011 12/29/2012 12/28/2013

Lifeline Customers 3326 3335 3134 2763 2407 1342

Wyoming Lifeline Customers

23

Figure 9: E-Rate Funding by State

California saw the largest increase in funding, from $13.1M in 2012 to $85M in 2014.

The California Teleconnect Fund (CTF) provides a 50% discount on select communications services to schools, libraries, hospitals, and other non-profit organizations.

40 As of January, 2013, the CTF program had over 7,000 participants including schools, libraries, and Community-

Based Organizations (CBOs). CBO participation was expected to increase as a result of an

outreach program for CBOs and government health care entities. CBOs that provide job

training, job placement, 2-1-1 information and referral, health care, educational, or community

technology program services qualify for CTF discounts. 41

The CPUC continues to review how

E-Rate funding should be distributed.

Maine also increased its E-Rate funding, which grew from $1,800,000 in 2012 to

$3,830,000 in 2014.

Funding in Rhode Island and Wisconsin did not change between 2012 and 2014.

40

See California Teleconnect Fund Brochure, Available At

http://www.cpuc.ca.gov/NR/rdonlyres/BC29DF98-FEBB-4FF9-9269-

1CAC512AD736/0/CTFBrochureWebVersionJuly2014.pdf

41

California Public Utility Commission, Order Instituting Rulemaking to Conduct a

Comprehensive Examination of the California Teleconnect Fund, Rulemaking 13-01-010, 1/31/2013,

available at http://docs.cpuc.ca.gov/SearchRes.aspx?DocFormat=ALL&DocID=47295862. This

proceeding remains open to consider changes required to the program surcharge.

CA, $85,000,000

ME, $3,830,000

OK, $36,445,707

RI, $1,200,000

WI, $36,809,200

24

6. Telecommunications Equipment Program (TEP)

TEP funds assistive devices for the hearing, speech, and visually impaired. This

equipment includes TTY devices, caption telephone equipment, and, in some states, tablets and

other devices that enable the deaf and hard of hearing to communicate. Fifteen states have

equipment funds--California, Georgia, Illinois, Iowa, Kansas, Kentucky, Maine, Minnesota, New

Hampshire, Oregon, Rhode Island, South Carolina, Washington, Wisconsin, and Wyoming. The

Oregon and Washington funds include expenditures for Telecommunications Relay Service as

well as TEP.

TEP funding remained nearly flat over the two-year study period, growing only from a

reported $46,578,421 in 2012 to $46,914,499 in 2014.

Legislation introduced in Georgia and Rhode Island in 2015 will add additional types of

equipment to the funds as well as broaden program eligibility.

In Georgia, HB 201 would expand the types of equipment covered by the program to

include wireless devices and applications in order to "ensure universal access to information by

blind and otherwise print disabled citizens of th[e] state." HB 201 would also increase program

eligibility by eliminating a current provision that limited TEP funding only to persons with

incomes below 200% of the poverty level.42

Finally, a pilot program being administered by the

Georgia Council for the Hearing Impaired will test the distribution of iPads with specialized

applications for Video Relay Service, Captioned Relay Service, and other software to deaf, blind,

deaf-blind, and hard of hearing consumers to provide "functional equivalency". 43

Legislation introduced in Rhode Island (H.B. 5685) would add wireless phones to the

State's equipment loan program for persons who are deaf, hard-of-hearing, severely speech

impaired, or have neuromuscular impairments.44

Figure 10 shows the states that provide funding for assistive telecommunications

equipment.

42

See Georgia House Bill 201, available at https://legiscan.com/GA/text/HB201/id/1171521/Georgia-2015-HB201-Comm_Sub.pdf

43 See Georgia Public Service Commission, Georgia Council for the Hearing Impaired, iPad

brochure, available at gachi.org

44 Rhode Island Senate Bill 5685, an Act Relating To Public Utilities and Carriers -- Public Utilities Commission--Information Accessibility Service for Persons with Disabilities, available at

https://legiscan.com/RI/text/H5685/id/1143720/Rhode_Island-2015-H5685-Introduced.pdf

25

Figure 10: TEP Funding by State

7. Telecommunications Relay Service (TRS)

TRS provides telephone accessibility to persons who are deaf, deaf-blind, hard of

hearing, or speech disabled. A specially trained communications assistant facilitates the

telephone conversation between a person who has hearing loss or a speech disability and the

person with whom they wish to speak.

When using traditional TRS, the person with hearing loss uses a teletypewriter (TTY) to

communicate with the communications assistant at the relay center, who will then converse with

the hearing individual. In some states, TRS funds include support for captioned telephone

service where the text of the communication is displayed on specialized equipment; speech to

speech (STS) where a person has difficulty speaking or being understood; relay in other

languages, such as Spanish; and video relay (where a user may use sign language to

communicate via the communications assistant). TRS is required by Title IV of the Americans

with Disabilities Act and to the extent possible must be "functionally equivalent" to standard

telephone service.45

45

Consumers' Guide to Telecommunications Relay Service (TRS), available at

www.fcc.gov/cgb/dro/trs/con_trs.html

CA, $28,000,000

GA, $763,000

IL, $3,396,370

IA, $459,129

KS, $450,000 KY,

$90,000

ME, $185,000

MN, $1,400,000

NH, $96,000 OR, $4,600,000

RI, $75,000

SC, $600,000

WA, $5,000,000

WI, $1,800,000 WY, $12,781

.

26

TRS funding has remained nearly flat over the period. Twenty-nine states have discrete

TRS funds totaling $86,868,607. Three states, Illinois, Oregon, and Washington, include TRS

funding in their TEP funds.

North Carolina has the largest fund, at $16,670,356. North Carolina assesses both

wireline and wireless carriers. 2014 funding increased from $10,831,459 in 2012 to $16,670,356

in 2014 due to an increase in the assessment rate from $0.11 in 2012 to $0.13 in 2013.46

Figure 11 shows TRS funding by state.

Figure 11: TRS Funding by State

8. Other Funds

Nine states (AK, GA, ME, MN, NE, RI, SC, VT, and Wisconsin) use universal service

funds to support other public welfare services. This funding totaled $25,512,292 for 2014, down

slightly over $11,000,000 from 2012.

46

North Carolina did not report on the size of its TRS fund in NRRI's 2012 USF survey.

AK, $54,451 CT, $1,745,171.62 DC, $283,611

GA, $1,400,000

ID, $139,000

IA, $823,190

KS, $928,000 KY, $90,000

ME, $600,000

MD, $7,800,000

MN, $2,400,000

MS, $725,000

MO, $1,500,000

MT, $1,400,000

NE, $770,342

NV, $1,202,373

NY, $5,600,000

NC, $16,670,356

ND, $360,000

OH, $2,954,598

OK, $7,136,931

RI, $470,084

SC, $2,200,000 SD, $1,500,000

WV, $360,000 WI, $2,055,000 WY, $444,729

Note: IL, OR, and WA combine TAP and TRS.

27

Table 1 shows the distribution of other support funds by state.

Table 1: Other USF Funds

State Project 2014 Funding

Alaska Public Access Payphones, Dial

Equipment Minutes (DEM) $1,457,292

Georgia Hearing Aids $797,000

Maine Public Access Payphones $50,000

Minnesota

News for the Blind/Closed

captioning/Commission of Deaf, Deaf-

Blind and Hard of Hearing Minnesotans

$1,640,000

Nebraska Telehealth $900,000

Rhode Island News For the Blind $40,000

South Carolina Closed captioning $500,000

Vermont E911 $5,000,000

Wisconsin Telehealth $1,000,000

Alaska and Maine fund the placement of payphones in public areas like courthouses, post

offices, and other areas accessible to those who need to make calls but do not have home phones

or cell phones. Funding for public access payphones continues to be an important function of the

state universal service fund, despite the availability of Lifeline service.

Georgia and Rhode Island provide services that read information, generally the

newspaper or other news materials, to the blind. The Georgia Audible Universal Information

Access Service (AUIAS) provides blind and print disabled citizens the opportunity to listen to

newspapers and magazines by calling a toll free number and entering a PIN. Rhode Island

provides a similar service.

Georgia's State Universal Service Fund also provides hearing aids to citizens who cannot

otherwise afford them.

Minnesota also uses its TRS funds to support rural real time closed-captioning of certain

local television news programs. The Accessible News for the Blind program provides electronic

information) for the blind and disabled. The Commission of Deaf, Deaf-Blind and Hard-of-

Hearing Minnesotans receives funding for operational expenses, to provide information on their

Web site in American Sign Language, and to provide technical assistance to state agencies. The

Office of Enterprise Technology receives funding to coordinate technology accessibility and

usability. The Legislative Coordination Commission receives funding to be used for captioning

of live streaming of legislative activity on the LCCs Web site.

28

South Carolina funds closed captioning so that hearing impaired citizens may watch

television.

Nebraska and Wyoming fund "telehealth" services similar to those funded by the FCC's

Telemedicine fund. Funding for telehealth services may increase in the states as the rules for

such programs become more flexible.

Finally, Vermont uses state USF funds to support E911.

IV. State Fund Contributors and Recipients

State Universal Service Fund (SUSF) support is a key factor in ensuring that all citizens

have access to critical communications services as well as in expanding the availability of

broadband, particularly in rural areas. Through state high cost funds, SUSF also ensures that

rural companies are given the time and support necessary to meet the challenges of a changing

telecommunications landscape. Both State and federal contributions are passed on to end users

via surcharges on their bills. For this reason, a stable contribution plan that includes as many

types of providers as possible is a key factor in the success of universal service support.

Contribution levels that are too high penalize consumers for the services they buy and may drive

them to use alternative services that do not pay into the fund. Contribution levels that are too

low reduce the funds available to support key public interest programs.

The Federal USF relies on funds contributed by wireline, wireless, and interconnected

VoIP carriers. The Federal USF assesses all providers similarly, at a flat percentage rate, 17.4%

for 2Q2015. This rate is adjusted quarterly and has risen steadily since the fund's inception.47

Fund recipients must be Eligible Telecommunications Carriers (ETCs) and provide service in

high cost areas. The USF Transformation Order will require the